Choosing between operating as a sole trader or through a company involves more than just the headline tax rate. While the 25% company rate can be lower than a sole trader’s marginal rate, the total tax picture only becomes clear when you factor in personal drawings (as salary or dividends), compliance costs, and the timing of when tax is paid.
Key Takeaways
- Sole traders pay income tax at progressive personal rates (up to 45% + Medicare levy)
- Companies pay a flat 25% (base rate entities under $50M turnover) or 30%
- A company only saves tax if profits are retained in the company — drawings are taxed again
- The company rate advantage narrows once you extract the money as salary or dividends
- Compliance costs for a company are significantly higher than for a sole trader
Sole Trader Tax
As a sole trader, your business income is your personal income. You pay:
- The standard progressive income tax rates
- The 2% Medicare levy
- The Medicare Levy Surcharge if applicable
There is no separation between you and the business. You report business income and deductions in the individual income tax return.
Advantages:
- Simple — no separate tax return for the business
- Low compliance cost
- Capital gains on sale of business assets benefit from the 50% CGT discount (for assets held 12+ months)
Disadvantage:
- At higher incomes, the marginal rate is 37% or 45% — higher than the company rate
Company Tax
A company pays 25% (base rate entity) or 30% on its taxable profits, regardless of your personal income. This can create a tax deferral benefit.
Example — tax in the company vs personal:
A profitable business generates $200,000 net profit:
| Structure | Tax payable | After-tax funds |
|---|---|---|
| Sole trader (marginal rate 47%) | ~$78,000 | $122,000 |
| Company (25%) | $50,000 | $150,000 |
The company has $28,000 more available after tax — which can be reinvested in the business.
But the tax does not end there. If you want to access the profits personally, you need to draw them as salary (taxed at personal rates) or dividends (taxed personally with a franking credit for the company tax paid).
Dividends and the Franking Effect
When the company pays you a dividend from its post-tax profits:
- The dividend carries a franking credit for the 25% company tax already paid
- You include the grossed-up amount in your personal income
- The franking credit offsets your personal tax
At 47% marginal rate (income above $190,000):
- $75 dividend + $25 franking credit = $100 grossed-up income
- Personal tax at 47%: $47
- Less franking credit: −$25
- Net personal tax: $22
- Total tax through company (25% company + 22% personal): ~47%
The total tax ends up being roughly the same as the top marginal rate once you extract the profits. The benefit of the company structure is tax deferral — not a permanent tax saving — for those who keep reinvesting profits in the business.
When the Company Structure Is Beneficial
A company structure may make sense if:
- You retain significant profits in the business (not extracting everything personally)
- Your personal marginal rate is above 25–30% and you have genuine reinvestment plans
- You have multiple shareholders (can split dividends among lower-income family members)
- Liability protection is important to you (a company provides separate legal entity protection)
A company structure is unlikely to result in a tax saving if:
- You withdraw all profits each year as salary or dividends
- Your income is in the 19% or lower brackets
- The compliance cost ($1,500–$5,000/year or more for accounting and ASIC fees) outweighs the tax difference
The Cost of Operating a Company
| Cost | Sole Trader | Company |
|---|---|---|
| ASIC annual review fee | Nil | ~$310/year |
| Accounting/tax return | Lower (single personal return) | Higher (company + personal return) |
| Bookkeeping | Same | Same |
| Legal structure setup | Nil | $1,000–$3,000+ |
| Director obligations | None | Significant (legal duties) |
For a sole trader earning $80,000, the compliance cost of incorporating is rarely justified by the tax saving (which may be minimal at that income level once salary or dividends are considered).
Frequently Asked Questions
At what income does a company structure start to make financial sense? As a very general guide, once your business profits substantially exceed the income you need to live on and you have genuine plans to reinvest, the company structure can create meaningful tax deferral. The tipping point depends on your personal income, family circumstances, and business growth plans — this is a question for your accountant.
Can I pay myself a salary from my company to reduce company tax? Yes. A salary is a deductible expense for the company — it reduces the company’s taxable income. The salary is then taxed at your personal rates. This is a common way to balance tax between the company and personally.
What is a bucket company? A bucket company is an arrangement where a family trust distributes income to a corporate beneficiary rather than to individuals, retaining it in the company at the 25% or 30% rate. This is a strategy sometimes used by business owners to reduce the current-year tax on retained profits, but it has complex implications for accessing the funds and for estate planning.
Can a sole trader claim the 50% CGT discount? Yes. If a sole trader sells a business asset held for more than 12 months, the 50% CGT discount applies. A company does not access the 50% CGT discount — companies pay full tax on capital gains (the small business CGT concessions may provide some relief for qualifying businesses).
This article provides general tax information. Business structure decisions are complex and depend significantly on individual circumstances. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.